The Gallup poll surveys Americans every year about the taxes they pay, and every year a hefty majority says that taxes are too high.1 Whenever I mentioned this to economists in other countries, they laughed. Nobody in the world’s other rich democracies would say that American taxes are too high. Relative to other countries like us, the United States is One Nation, Undertaxed.
This is not a political statement or an editorial opinion. It’s a fact: Americans pay significantly less than our counterparts in the world’s other advanced, free-market economies. In terms of the overall tax burden, Americans pay less. In terms of specific taxes—income tax, sales tax, gasoline tax, and so on—American rates are almost always lower. (On the other hand, Americans tend to give more than anybody else to charity, because we use private charities to perform some of the tasks funded by taxes elsewhere.) The one clear exception to this pattern is the corporate income tax, where the official tax rate and the “effective” rate (how much corporations actually pay, after the tax lawyers have orchestrated various avoidance mechanisms) are higher in the United States than in almost any other nation.
A standard way to measure national tax burdens is to calculate a country’s total tax revenues—national, state, and local—as a percentage of gross domestic product (the sum of all the wealth produced in the country in a year). This statistic, called the “overall tax burden,” is measured annually by the Organization for Economic Cooperation and Development (OECD), which is sort of a United Nations but with membership limited only to the richest countries. For many years now, the OECD’s calculation of overall tax burden has shown that total tax revenues in the United States are much lower than in most other advanced countries.
For the year 2014, the OECD reports that overall tax burden for all of its thirty-five member countries averaged 34.18% of GDP. Some countries impose taxes at a considerably higher level. In Denmark, taxes amounted to almost half—49.58%—of all the wealth that country produced in 2014; in France and Belgium, the tax take was about 45% of GDP. A few European countries, like Ireland (28.71%) and Switzerland (27.03%), taxed somewhat below the OECD average. Generally, though, the overall tax burden in the democracies of Western Europe was in the neighborhood of 40% of GDP.
In the world’s richest country, the United States, taxes were far lower: 25.88% of GDP. Of the thirty-five richest countries, in fact, the United States rated thirty-second in total taxes paid; only in South Korea, Chile, and Mexico did people face a lower tax burden than Americans.
Here’s the OECD’s chart of total tax revenue as a percentage of GDP, by country, for the year 2014:
|
Country |
Overall tax burden |
|
Denmark |
49.58 |
|
France |
45.49 |
|
Belgium |
45.00 |
|
Finland |
43.84 |
|
Italy |
43.69 |
|
Austria |
42.82 |
|
Sweden |
42.78 |
|
Iceland |
38.92 |
|
Norway |
38.68 |
|
Luxembourg |
38.37 |
|
Hungary |
38.23 |
|
Netherlands |
37.52 |
|
Germany |
36.57 |
|
Slovenia |
36.49 |
|
Greece |
35.77 |
|
OECD average |
34.18 |
|
Portugal |
34.17 |
|
Spain |
33.85 |
|
Czech Republic |
33.09 |
|
New Zealand |
32.52 |
|
Estonia |
32.43 |
|
Poland |
32.08 |
|
United Kingdom |
32.07 |
|
Japan |
32.04 |
|
Israel |
31.25 |
|
Slovakia |
31.25 |
|
Canada |
31.22 |
|
Latvia |
28.87 |
|
Turkey |
28.76 |
|
Ireland |
28.71 |
|
Australia |
27.85 |
|
Switzerland |
27.03 |
|
United States |
25.88 |
|
South Korea |
24.59 |
|
Chile |
19.75 |
|
Mexico |
15.15 |
|
Source: Revenue statistics: Comparative tables, OECD Tax Statistics |
|
This comparison raises an intriguing question about the impact of high taxes on the overall economy. In America, it is often said that high taxes stifle economic growth. But Denmark and Sweden have a much higher tax burden than the United States, and yet both countries have had higher rates of growth than the United States for most of the last five decades. In those nations, clearly, high taxes did not stifle growth.
Another international institution, the World Bank, makes its own comparison of the tax burden in different countries. The World Bank uses a different formula from the OECD’s, but it comes to the same conclusion: the United States is a low-tax nation. To determine this, the bank’s economists use three basic measurements:
The United States, as the world’s richest nation, naturally leads all others in tax capacity. But when it comes to tax effort and tax collection, we rate near the bottom of all the advanced countries. Most of the rich democracies in the world—Australia, Austria, Belgium, Britain, France, Italy, the Netherlands, Norway, and so on—are classified as “high effort” and “high collection” countries. In contrast, the United States (along with Canada, Japan, and South Korea) is rated as both “low effort” and “low collection.”2
Because Americans pay less than their counterparts in other rich countries in overall taxes, it’s not terribly surprising that we pay less, for the most part, for specific types of taxes, such as the income tax, Social Security tax, sales tax, gas tax, tobacco tax, capital gains tax, and taxes on wealth and inheritance.
Taxes on Labor: This means the taxes that are imposed on wages and salaries—essentially, the income tax on earnings plus the taxes that pay for health care, pensions, and so on (in the United States, that would mean the total of a worker’s personal income tax, Social Security tax, and the Medicare tax). The average tax on labor in all OECD countries in 2013 was 36%; for Americans, it was 31.3%. Of the thirty-four member countries, the United States ranked twenty-fifth in taxing wages and salaries.
The Top Rate: It’s not easy to compare income tax collection from country to country, because each country has its own definition of “income” and its own schedule of exemptions, deductions, and so on. But you can match up the top marginal rate of tax in various countries—that is, the maximum tax rate imposed on the highest level of income. France is the world champion at soaking the rich, although it finally had to cut the 75% top rate it imposed on the biggest earners. In 2013, Denmark taxed top earnings at 60.4%, and several advanced countries (for example, Belgium, Germany, Sweden, and Portugal) had a top rate higher than 50%.
In the United States, the highest rate at the start of 2017 was 39.6%. If you add in the average top rate in state taxes, high-income Americans on average pay 46.3% in tax on their highest earnings. On this score, the United States rates a little below the average; seventeen of the OECD countries have a higher top rate, and sixteen are lower. The lowest rate on the rich is in the flat-tax nation of Hungary, where everybody, rich or not, pays income tax at 15%. But Hungary has to impose the world’s highest sales tax to make up the revenues lost due to its minimal income tax rate.
In the United States, however, hardly anybody pays tax at that top rate because you have to be pretty rich before the highest rate kicks in. Americans pay 39.6% only on income higher than $418,400; that rate hits less than 1% of U.S. taxpayers. Other countries start applying the top rate at much lower income levels. In Belgium, the top rate is 53%, and it applies to any income above $56,171; half of all taxpayers are subject to the highest rate. In Sweden, the top rate (56.7%) kicks in at $81,698; that hits about 45% of all taxpayers. In Norway, the top rate is 40%, which is just about equal to America’s. But Norwegians have to start paying at that rate at an income of $95,270.3
Capital Gains Tax: A capital gain is the profit you make by trading stocks and bonds, or real estate, or commodities like gold. If you sell some shares of stock for $50,000 more than you paid for them, the $50,000 you gained is considered income. But in many countries, this kind of income is taxed differently (and often at a lower rate) than “ordinary income” from wages and salaries. Some countries—for example, New Zealand, the Czech Republic, and South Korea—have zero tax on profits from capital trading. In the United States, the federal tax on capital gains for most people is 15%; for those making more than a quarter of a million dollars per year, it goes up to 23.8%.
Because many states also tax capital gains, the average capital gains tax in the United States is about 19.1%—lower than in most of the other rich democracies (although it’s obviously higher than in the countries with no tax on capital gains). Here’s a comparison of some nations’ tax rates on capital gains in 2012:4
Australia: 22.5%
Austria: 25%
Britain: 28%
Czech Republic: 0%
Denmark: 42%
Finland: 32%
Ireland: 30%
Mexico: 0%
South Korea: 0%
Spain: 27%
United States: 19.1%
Sales Tax: Americans usually have to pay a retail sales tax on most things they buy at a store. Generally, there’s a state sales tax and often a city or county sales tax on top of that (although four states, Delaware, Montana, New Hampshire, and Oregon, have no sales tax). On average, the sales tax adds about 8% to the price of the item.5 But the United States, as we’ve seen, has no national sales tax, or value-added tax. In most other rich countries, in contrast, the sales tax—whether it’s called a VAT or a New Zealand–style GST—is about three times as high, in the range of 20% to 25%. The highest VAT in the world is found in Hungary; it was 27% in 2016.6
The result is a serious tax break for Americans. A Swede who buys, say, a $2,000 computer will pay an additional $500 in sales tax. A Texan buying the same computer would pay just $160 in tax. And an Oregonian would pay no sales tax.
Gas Tax: Because gasoline is a standard commodity sold around the world, market forces make the price of a gallon roughly the same everywhere—until you figure in the gas tax. Americans pay far less to fill the tank than drivers in any other rich country, because gas taxes here are far below the levels elsewhere. Of the richest thirty-five advanced democracies, the United States has the second-lowest level of fuel taxes; Mexico is lowest, with a gas tax of zero.
In the United States, the federal tax on a gallon of gas—18.4 cents—hasn’t changed for two decades. Every state imposes a gas tax on top of the federal levy. In 2014, California’s was the highest, at $0.71 per gallon; in most states, it’s closer to $0.40 per gallon. On average, Americans pay total taxes of $0.53 per gallon; Californians have to pay $0.89 per gallon.
Overseas, the gas tax is six to eight times higher. Turkey has the stiffest tax on gasoline, at $4.32 per gallon. In western Europe, the tax generally runs over $3.00 per gallon.7 Here’s a breakdown of gasoline taxes—federal, local, and sales tax all included—in some of the rich countries:
|
Country |
Tax per gallon |
|
Turkey |
$4.32 |
|
Israel |
$4.20 |
|
Netherlands |
$3.79 |
|
Norway |
$3.67 |
|
U.K. |
$3.44 |
|
Germany |
$3.29 |
|
OECD average |
$2.62 |
|
Austria |
$2.46 |
|
Japan |
$2.16 |
|
United States |
$0.53 |
|
Source: OECD |
|
Of course, those taxes come on top of the basic price of the gasoline itself. In the fall of 2016, when Americans were groaning about gasoline that cost about $2.10 per gallon, Europeans were paying $6.00; they considered that normal.
That explains why the rich countries of Europe and East Asia have such well-developed mass transit systems; even the most luxurious bullet train is generally cheaper than driving any significant distance. And why German, Japanese, and South Korean carmakers were so far ahead of Detroit in producing fuel-efficient cars.
Tobacco Tax: Taxing cigarettes is a twofer; it brings in steady revenue, and at the same time it discourages people from taking up an unhealthy habit. Consequently, the tax tends to be steep almost everywhere; in many countries, more than half of the price per pack is tax.
But American smokers get off easier. The U.S. federal tax on cigarettes is $1.01 per pack. States and cities then load on additional levies. Americans, on average, pay about $6.00 for a pack of cigarettes, of which roughly half is tax. The U.S. price is a bargain by European standards, where the same pack of cigarettes would cost about $9.00. In Canada, the same pack would cost about $10.00. The world’s highest price for cigarettes is in Australia, where a single pack costs about $16.00—two-thirds of it being tax.8
—
THE ONE AREA WHERE we (almost) lead the pack in tax rates is in the income tax on corporations. At the start of 2017, the U.S. corporate tax, at 35%, was the second highest in the world. Although France’s basic tax rate was a tad lower (33.3%), the French added special surtaxes for big corporations that brings the total rate to 38% for major French companies. Since the beginning of this century, almost all the other industrialized nations have cut their corporate tax rates, partly to give their domestic businesses a competitive advantage and partly to lure corporations away from the United States and other high-tax nations. The United States and France have been the only holdouts.
Here’s a sampling of federal corporate income tax rates, as of 2016 (note that some countries have a basic corporate rate and then a higher rate for oil companies):
|
Country |
Corporate tax rate |
|
Ireland |
12.5% |
|
Ireland (oil companies) |
25% |
|
Germany |
15.85% |
|
China |
25% |
|
Japan |
23.9% |
|
Sweden |
22% |
|
U.K. |
20% |
|
U.K. (oil companies) |
30% |
|
Mexico |
30% |
|
United States |
35% |
|
France |
38% |
|
Source: ey.com, 2016 Worldwide Corporate Tax Guide |
|
Our corporate tax code, of course, is riddled with exemptions and deductions and credits that sharply reduce the amount of tax corporations actually pay. Still, the amount that American corporations actually pay—this is known as the “effective rate”—is generally higher than corporations pay in other countries. Some giant companies have managed to manipulate these tax breaks so skillfully that they pay little or no U.S. income tax. U.S. companies have also devised intricate and ingenious runarounds so that their profits are taxed overseas, at the lower corporate rates due in foreign countries.
Beyond that, the United States is one of a handful of countries that impose corporate tax on income earned anywhere in the world, not just in the home country. In most industrialized countries, a company pays tax to its home country only on profits it has earned at home. The United States, though, imposes tax on an American company’s earnings no matter where the income was earned. However—and this is a multitrillion-dollar “however”—the foreign earnings are not taxed until the corporation brings them home to the United States. That is, a company can avoid the tax on its foreign earnings by keeping the profits overseas. And that’s precisely what they do. U.S. corporations have a vast accumulation of foreign earnings stashed in banks and securities around the world. Because that money has never been brought home, the companies don’t have to pay tax on it.
Yet this is a costly form of tax avoidance. If you can’t bring the money to the United States, you can’t use it here for salaries or capital investment or for paying dividends to stockholders. It seems possible that American companies have been way too clever about stashing their earnings overseas. There is so much corporate money out there—more than $2 trillion, by many estimates—that stockholders and employees of the companies are demanding that the funds be “repatriated” and distributed at home as salaries or dividends. The companies don’t want to pay the U.S. tax on that money, but at the same time they don’t particularly want to keep their profits stuck forever in a bank in Bratislava.
The extravagant tax on corporate income, though, doesn’t change the basic pattern we saw a few pages back. Overall, the United States is a low-tax country, compared with other rich democracies.
It shouldn’t come as a surprise, then, that the United States also rates low, comparatively, when it comes to government spending. You’d never know it from listening to our political debates, but the international organizations that study such things all agree that the U.S. government is a frugal penny-pincher—compared with the other rich countries, at least.
The World Bank each year computes government spending as a percentage of overall wealth (GDP) for all the world’s countries. In the poorest countries, where almost nobody has any money, government spending amounts to about 10% of GDP. In the rich countries of western Europe and East Asia, government spends roughly 20% to 26% of GDP (once again, Sweden and Denmark usually have the highest rate of government spending). In the United States, in 2015, governments at all levels spent a total of 15.5% of our GDP, which puts us near the bottom of the list. Among the world’s richest countries, only South Korea and Mexico had a lower rate of government spending.
The U.S. government is a huge spender, of course, on some things. We pour more money into national defense than anybody else; our defense budgets, in fact, are bigger than those in the next eleven countries combined. But American governments spend much less than other advanced democracies on social support for low-income and retired people.
Americans—individual citizens, that is, not the government—make up for that diminished public spending on social programs by generous private giving to charities, churches, schools, and hospitals. In 2013, American citizens and foundations gave some $335 billion to charity—about 2% of our GDP. Most other rich countries lag far behind us on this score. The French give 0.02% of GDP to charity—that is, one-hundredth of Americans’ giving. The British contribute 0.07% of GDP to charity; Canadians, 0.05%.9 As this pattern shows, the French, Brits, Canadians, and others expect government to bear the burden of social support for the needy; that’s why they willingly pay high taxes. Americans choose to make private donations a much bigger share of social spending.
While Americans pay much less in tax than our counterparts overseas, we complain about it much more.
There’s no country where people gripe as much as Americans do about taxes in general and the Internal Revenue Service in particular. Hardly anybody in any nation enjoys paying taxes. But in most developed countries, the national tax agency is a respected and admired branch of government. Swedes rate their national tax bureau as the most respected of all government agencies. All over the world, tax bureaucrats proudly wear neckties, jackets, and baseball caps bearing the agency logo. Tax bureaus like Her Majesty’s Revenue and Customs in the U.K., the Agenzia delle Entrate in Italy, Spain’s Agencia Tributaria, and Nigeria’s Federal Inland Revenue Service have their own banners, mascots, songs, and slogans. (“We can’t make paying taxes pleasant, but at least we can make it simple.”)
Chile’s Servicio de Impuestos Internos has adopted a mascot—a furry little chinchilla that serves as the tax bureau’s friendly face to the public. Ivo the Chinchilla (his name is a play on IVA, the Spanish equivalent of a VAT) stars in stage plays and movies, telling adults and schoolchildren how important it is that people pay all the tax they owe. “¡Son bacanes, los impuestos!” Ivo says in one film: “They’re awesome, those taxes!” Then he gets downright rhapsodic about the blessings of taxation. “When the government builds schools and bridges and hospitals and playgrounds,” Ivo says, “it’s all thanks to people paying their taxes on time.”10
One of the most beloved movies in Japan—a runaway winner of the Best Actress, Best Actor, Best Director, and Best Picture Oscars there—was Marusa no onna, or “Audit Bureau Woman.” (In the English-dubbed version of the movie, the title is A Taxing Woman.) It tells the tale of a charming but tenacious tax auditor in the Tokyo Audit Bureau of the National Tax Agency.
Our plucky heroine, played by Miyamoto Nobuko—Japan’s Meg Ryan—starts out investigating small local businesses. When she assesses a $2,000 penalty against a mom-and-pop grocery store, the owner responds in a rage: “Why do you go after small fry like us? Why don’t you aim at the really big tax cheats?” Chastised, Nobuko asks to be assigned to the account of a wealthy, well-connected gangland kingpin, a man who rides around Tokyo in a chauffeur-driven white Rolls-Royce—but never pays much tax. She spends the rest of the film following the big white Rolls on her little red motor scooter, uncovering a long trail of forged receipts, hidden cash, and fake bank accounts. In the climactic scene, when Nobuko digs through a mountain of paper and finds the telltale document that will send the tax evader to jail, the whole theater bursts into delighted applause. The credits tell us that the film is dedicated to “the steadfast resolve of the incorruptible Japanese Revenue Service.”
It’s hard to imagine Hollywood casting Meg Ryan, say, or Amy Schumer as a peppy, pretty tax collector in a sympathetic film about the “steadfast resolve” of the Internal Revenue Service. In America, rather, employees of the IRS say they routinely face anger and hostility when they tell people where they work. In 2010, an antigovernment fanatic flew a small plane into the IRS building in Austin, Texas, leaving one employee dead and a dozen injured; the pilot left a suicide note boasting of his attack on “Big Brother IRS man.” The agency is a common target of columnists, cartoonists, comedians, and congressmen. Politicians and pundits routinely compare IRS agents to terrorists. One of the regular events on the congressional calendar each year is a hearing where angry senators or representatives line up a group of hapless IRS bureaucrats at the witness table and berate them for a couple of hours because the tax system is so complicated and difficult.
Many members of Congress, of course, are serious, fair-minded public servants, but the institution has always had its share of grandstanders and hypocrites. When I was a congressional correspondent, I always thought the acme of arrogance and phoniness came in those IRS-bashing sessions before one committee or another. This is, after all, a classic case of blaming the messenger. It’s Congress that makes our tax code so complicated and difficult. It was Congress, not anybody in the IRS, who wrote Section 7803(c)(2)(B)(ii)(IX) and all the other impenetrable sections of the code. For the members who created this unruly mess to criticize the bureaucrats who have to administer it is like a chef who spills a vat of tomato soup and then complains to the janitor because the floor is dirty. And yet these hearings continue, Congress after Congress, because Americans love complaining about taxes and the agency that collects them.
Nobody likes paying taxes. But we pay them, because taxes are inescapable—nothing is certain, of course, except death and taxes—and because we’re convinced that taxes are necessary. But why are taxes necessary? What are they good for, anyway?